2000-2010: The journey of Sensex from 6K to 20K in 11 yrs

6000, February 11, 2000 - On February 11, 2000, the information technology boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 21, 2005 - On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time.

8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index – the Sensex - crossed the 8000 level following brisk buying by foreign and domestic funds in early trading.

9000, December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors.

10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10,000-mark on February 7, 2006.

11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points.

12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first time.

13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the first time. It touched a peak of 13,039.36 and finally closed at 13,024.26.

14000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000.

15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 mark.

16,000, September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000 mark.

17,000, September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000 mark for the first time.

18,000, October 9, 2007 - The Sensex on October 9, 2007 crossed the 18,000 mark for the first time.

19,000, October 15, 2007 - The Sensex on October 15, 2007 crossed the 19,000 mark for the first time.

20,000, October 29, 2007 - The Sensex on October 29, 2007 crossed the 20,000 mark for the first time.

21,000, Jan 08, 2008 - The Sensex on January 8, 2008 touched all time peak of 21078 before closing at 20873.

Book Value and Price to Book Ratio

Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time.

Book value can be figured as assets minus liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value.  

You can also compare a company's market price to its book value(P/B) on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result to the current stock price to help determine if the company's stock is fairly valued. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock may be undervalued and a bargain to investors. In fact, the company itself may be a bargain, and hence a takeover target.

Current Ratio

Current assets divided by current liabilities yields the current ratio, a measure of a company's liquidity, or its ability to meet current debts.

The higher the ratio, the greater the liquidity.

As a rule of thumb, a healthy company's current ratio is 2 to 1 or greater.

Debt to Equity Ratio

Debt-to-equity ratio provides a measure of a company's debt level. It is calculated by dividing total liabilities by shareholders' equity.

A ratio of 1 to 2 or lower indicates that a company has relatively little debt. Ratios vary, however, depending on a company's size and its industry, so compare a company's financial ratios with those of its industry peers before drawing conclusions.

What to do in a falling market?

It is appropriate for most long term investors to have at least part of their portfolio invested in shares. A long term investor is someone who does not need access to investment capital for at least five years, and who may or may not require income from that capital. If you are not a long term investor and you own shares, you should question whether you have the right investment strategy.

The extent to which you invest in shares will depend on a number of factors, but mostly on how comfortable you are with volatility. All share investors know that shares can be volatile but that the effects of volatility reduce over time. The secret to making good returns from a long term investment in shares is to ride through the ups and downs. Don’t get caught up in the cycles of fear and greed. Keep your focus on the long term horizon; stay calm and confident. There will always be periods of time when putting your money in the bank will give you a higher return, but bank deposits are not a good long term investment.

Trying to switch between shares, when they growing in value, and bank deposits, when shares are falling, has been proven not to work as an investment strategy as it is difficult to identify the market turning points until well after the event. Make sure your portfolio is diversified, that is, you own shares in many different companies (either directly or through a managed fund) and own investments in other asset classes such as fixed interest and property rather than having all your funds in shares.

If you wish to reduce your exposure to shares either because you are uncomfortable or because you need access to your capital, it can be very difficult to assess the best time to sell. You can lessen the risks of uncertainty by selling up your portfolio gradually over a period of several months rather than selling it all at once and taking a chance that you are selling at the best time.

Price to Earnings Growth Multiple (PEG)

The PEG multiple takes the P/E analysis to the next stage. Since P/E ratios are computed based on historic earnings, they project an inaccurate picture of the future. The PEG multiple uses expected growth in earnings, to give investors additional information.

The PEG divides the historical P/E ratio by the compounded annual growth rate of future earnings. Generally, the compounded earnings growth is calculated using the forecasted earnings for the next two-three years.

For example, if a company is quoting at a P/E of 60 based on historic earnings and the compounded annual growth rate of its earnings for the next three years is 20 per cent, then its PEG is 3.

The lower the PEG, the more attractive the stock becomes as an investment proposition. It is obviously more appealing to buy a stock on a P/E of 20 whose earnings are growing at 50 per cent than to buy a stock on a multiple of 50 whose earnings are growing at 20 per cent.

As a thumb rule, stocks quoting at a PEG multiple below 0.5 are considered to be undervalued, 1 to be fairly valued, and 2 to be overvalued.

How is a P/E multiple used?

Is a stock trading at a P/E of 30 more expensive than a stock trading at a P/E of 60? Such a wide variation in P/E multiples can be owing to a few reasons. If the companies are in the same industry, it could be that the company with a high P/E may be one with superior size and financials, with better prospects or even better management. The market expects this stock to outperform its peers. If they are from different industries, it could also be due to different growth prospects. For example, an energy utility will have a more sedate earnings profile than say a software company.

Stock prices, in isolation do not give any indication whether the stock is undervalued or overvalued. They have to be viewed along with the company's future prospects to arrive at any conclusion. Generally, higher the expected growth in a company's earnings, higher is the P/E multiple that it attracts in the market. The time period used for P/E calculations depends on the investment horizon of the investor and would be different for each investor. However, P/E multiples cannot be applied to loss making companies since they do not have any earnings.